The LDP (won 294 seats), lead by Mr Abe, together with their coalition partner, Komeito, won 325 seats (out of 480 seats) in the lower house, which would give the coalition the 2/3 rds needed to approve most legislation without the need for ratification by the Upper House, which they do not control. Voter turnout was 59.3%, the lowest since World War 11, emphasizing the collapse of support for the DJP, rather than enthusiasm for the LDP coalition. Elections for the Upper House will take place 8 months ahead.
Mr Abe, who will become PM once again, has promised a much looser fiscal policy and to raise inflation to 2.0% with nominal growth of 3.0%, whilst embarking on a capital expenditure programme to stimulate the economy. In addition, the LDP/Komeito coalition have threatened to take a more aggressive policy position with China, in respect of disputed territory in the South China seas and, furthermore, has threatened to change Japan’s current pacifist constitution. Defence spending will increase, in any event.The nationalist Japan Restoration Party, also in favour of taking a tougher position with China, is projected to win more than 50 seats which will make it the 3rd largest party after the DPJ, who may retain less than 60 seats, well below the 300 in the 2009 elections.
The Yen should continue to decline on this outcome. The BoJ meets on the 20th December and is expected to announce further monetary loosening of between Yen 5tr to Yen 10tr, though they may delay their plans until after the new governments policies are announced. Its going to be interesting to see what the ratings agencies do. Moody’s stated that Japan would face “negative credit implications” if it cannot raise its potential growth rate and/or delays the proposed sales tax hike, unless the government cuts other spending. Fitch warned that delaying fiscal consolidation would weigh on Japan’s A+ rating, including delaying or cancelling the agreed doubling of the sales tax.
I continue to be deeply concerned about the conflicting territorial claims in the South China seas, in particular as the market remains remarkably complacent on this issue. The risks of an accident leading to conflict will increase.
I remain short the Yen;
In his first speech since winning in the general election, Mr Abe has (a) reiterated his plans to stop deflation and weaken the Yen, (b) restated Japanese ownership of the disputed islands in the South China seas vowing to protect Japanese territory and (c) has called for a special session of the Diet, the Japanese Parliament, for 26th December. The Japanese economy is in recession at present, having contracted in Q2 and Q3. With debt to GDP around 220%, a budget deficit of 10%+ of GDP, policies to increase inflation and, as a result bond yields, could well prove dangerous. However, for the moment Japanese markets remain positive, with the Nikkei up over +0.9% today ;
Chinese authorities will seek better “quality and efficiency” and sustained and healthy development” in terms of economic growth next year. The phrases used suggests that the leadership will seek lower growth rates in return for a more sustainable growth model. There were also calls for further urbanisation;
China has scrapped investment limits by foreign wealth funds and central banks in its capital markets. The move is to promote more long term investment and to gradually open up China’s capital account. Its foreign-currency quota for qualified investors under its QF11 programme is also likely to be increased once the current limit of US$80bn is utilised. I continue to be positive on Chinese markets, which closed some +0.6% higher today and is just around 2.0% lower for the year;
The Indian government has cut its GDP forecast for the year to 31st March to +5.7% to +5.9%, from +7.85% previously, the slowest growth rate since 2003. Inflation in March 2013 is expected to decline to +6.8% to +7.0%, with the budget deficit coming in at -5.3% of GDP. The Indian Central bank, the RBI meets tomorrow;
Mr Monti is expected to resign as PM in a weeks time following the passage the 2013 budget. In addition, Italian press reports suggest that he will not stand for PM in the upcoming general elections, expected in February next year;
The EU heads of State summit failed to make any progress on budget integration/fiscal union last week. The matter is to be discussed yet again in June, though Germany clearly does not want to proceed on budget integration, especially ahead of their general elections next September.
Mrs Merkel has warned that excessive social welfare spending in Europe will need to be reduced to restore competitiveness. Yes and, in any event, its unaffordable;
EZ October seasonally adjusted trade balance came in at E7.9bn M/M, well below the E11.0bn expected and the revised E11.0bn in September;
US manufacturers have announced some US$90bn of capex investments over the last 2 years, to take advantage of surging supplies of cheap natural gas. Natural gas is priced at US$3.30 per mBTU in the US, though LNG is being sold at US$16 per mBTU in Asia and Europe. The major increase in natural gas production will prove a significant benefit to the energy intensive industries, including petrochemical, fertiliser, steel and fuel sectors and place the US at a major advantage over other countries. (Source FT);
Mr Boehner, the Republican speaker of the House of Representatives, has suggested that tax rates for Americans earning over US$1mn per year could be raised, a major concession in ongoing discussions with President Obama over the US$600bn fiscal cliff issue. President Obama proposes to raise taxes on those earning over US$250k per year. In addition, the House speaker suggested that there would be no fight over raising the debt ceiling for at least 1 year and that the Republicans would consider new revenue sources if the Democrats/President committed to significant spending cuts, including on pension and healthcare. A compromise deal is likely, though possibly early in the New Year;
US December Empire manufacturing index came in at -8.1, much worse than the -1.0 expected and the previous -5.22 in November. New orders were particularly weak, coming in at -3.70, from +3.08 previously;
CFTC Commitments of Traders report (which discloses net speculative positions up to the previous Tuesday) reveals, in particular:
- an increase in net Yen shorts;
- an increase in net C$ longs;
- an increase in net long A$;
- flat Euro shorts;
- flat GBP longs.
The Yen shorts are their highest level since 2007 and its the first time that A$ longs have exceeded 100k contracts (103k);
US TIC date shows that the net total of all foreign financial outflows came in at -US$56.7bn in October M/M, from +US$4.3bn in September. In addition, net purchases of foreign securities increased to US$27.1bn, the largest sequential increase in more than 1 year. The data shows that the massive inflows into US assets in 2010 and 2011 have declined, suggesting that investors are taking more market risk, even though foreign central bank purchases of US$ assets continues;
Outlook
Asian markets closed mixed, with Japan and China higher. European markets are flat to lower. US markets are higher.
The Euro is trading at US$1.3172, slightly higher on the day, with the Yen at 83.73 against the US$, weaker on the day.
Spot gold is trading around US$1696, relatively flat on the day, with oil (Feb Brent) weaker at US$105.39.
All eyes on Japan over the next few days and the US in respect of the fiscal cliff negotiations – I continue to believe that there will be a compromise between Republicans and Democrats.
I continue to buy on weakness.
Kiron Sarkar
17th December 2012
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